Archive for May, 2017

In the last week, since the regional banks got downgraded, the hedge funds put in place the so called widowmaker trade – shorting the banks.

It is called the widowmaker trades as a lot of hedge funds tried this trade and got burnt (so they shorted by then someone came in and rallied the bank and they had to cover their positions provoking a huge rally).

The Australian market is still 30% down respect to its peak at 6,574. So, much cheaper than the much loved US market (mainly as we have no IT).

I am not in love with banks, but the widowmaker trade will come again (and banks will rally).

North Korea is accelerating the tests and there has been even a commentary by the Chinese media that soon they will reach ICBM nuclear capacity.

The US is deploying a third aircraft battle group towards the Sea of Japan. Three battle groups (Vinson, Reagan and now Nimitz) in the Pacific is almost unheard of – I checked up till 1985 – never happened.

As the USS Nimitz just left harbour, the travel time is circa 20 days.

And all this while President Trump is battling FBI Russian probes, nepotism (Kushner) and other blowback s at home and angry comments from the European allies.

Acting Assistant Secretary of State Susan Thornton told reporters in Beijing on Friday 26 that North Korea is a “time-limited problem set.” And the new South Korean President Moon Jae-in did not make himself any favors hinting that South Korea could move to be closer to China than US.

On the few positive side, the new carrier could be just a rotation and general Mattis said that a 2 Korean War would be tragic (well the first one was very tragic with close to 3 million killed, including 1.6 million civilians).

The only moment of reprieve for Trump was when he launched the cruise missile salvo to Syria.

Could he want to do the same? It would be a good distraction as shown in various Hollywood movies (“Wag the Dog” comes into my mind).

By the way: most of the time a war produces a very sharp and very short market correction that has always been the start of new rally.

This time would be the same – even if a cyberattack could potentially lead to just a temporary closure of all stock exchanges.

At the start of the 1 World War the main stock exchange NYSE closed between 30 July and 12 December – but brokers still buy/sold in over the counter markets and in 2015 the market almost doubled making a top that lasted until 1932!

Merkel practically said that the era of Europe leaving under the shadow of the US is finished and Europe will have to walk by itself.

Of special interest is the President trump unwilling to confirm the Article 5 (intervention of the alliance in case of attack) and the climate change denial .

This has good and bad implications.

Good.

– Europe can never strive under the economic clout of the US.

-With Macron in France, there is now a real opportunity that Germany and France start for real to “pull their weight” and really make Europe the third pole -aside the US and China.

Bad

Apparently President Trump never understood (well, between many other things) that the European Union was created to contain Germany (two times Germany was not contained the world had two major wars) and stop Russia. Before Ukraine there was a strange re alignment between Germany and Russia.

With a two days visit, President Trump created the possibility of an ancient horror to come back. Will it? Who knows. In 1929 Germany was a destroyed and pacified country. 10 years after was rebuilt and took on the world, almost winning. Now things move so much faster.

That is the reality.

As for conspiracy theory (too good to pass it on)

If “Spectre of 007” existed – this would be the final phase of the German resurgence.

The financial crisis made Germany the “de facto” savior and first nation of Europe.

Brexit eliminated the only real danger to German dominance within Europe

President Trump is eliminating the containment structure for Germany in the world.

After many warnings from Moodys, the IMF and S&P, Moodys moved and downgraded China rating (but with stable outlook to soften the blow).

Logically the Chinese Government was furious as they say say they are enacting reforms and the Chinese Debt to GDP is about 40% (Eg Australia is 41%) (Note in reality the big issue is that the Debt is held at regional level so does not show in the Western Debt to GDP measure – so it much higher the real one is somewhere between 250% and 300% (Font The economist, CNBC, Bloomberg).

The market did not move much on the news as the Chinese market is self contained (most of the corporate debt is owned by Chinese that, correctly, do not care or trust US rating agencies) and probably in China you would not dare to short the market on such a news, if you cared for your family.

The real bad outcome is the classic rating agency behaviour that always worsen the situation (as the reader should I am really against rating agencies).

During the Global Financial Crisis, first the rating agency committed the error of rating very good bad product (as they misunderstood them or got paid to misunderstand) and then, by downgrading the rating during the GFC created even more problem).

Now the issue with this rating (and probably a soon to be rating downgrade of S&P) is that Chinese corporation will not be able to get debt overseas – so they will ask debt from China provoking an increase of the debt issue.

Still China, being self-contained, has more time than a normal country to fix the problem …but not infinite.

So the issues are two – the downgrade worsen an already bad situation and it is hard to see how China can enact the needed reforms and keep the GDP growth at 6.5%pa (even if it is manipulated).

North Korea issue disappeared by the media headline, but it is still there.

It is quite hard to find information (a bit worrying).

From what I gather:

-Another US aircraft group (the Ronald Reagan) entered the Korean area

-There has been an accident on the DMZ (North Korea flew what apparently was a drone and South Korea shot warning shots at it with heavy machine gun.

-There have been some speeches (specially from Gen Mattis) that a North Korean war would be too violent – it could real or disinformation

-It seems that the ransomware that last week hit everything could have been generated from North Korea (unless someone planted a North Korean code in it).

-The 2 latest missiles test were quite worrying. The first is medium range (5,000Km) ICBM – very close to the intercontinental missiles needed to hit the US West Coast) and the second is just a short range (500km), but already ready to be combat-deployed.

As a post before – why North Korea hate so much the US? In the North Korean War of the 1950s the US practically carpet bombed the entire North Korea killing between 10% and 20% of the population. And an armistice was signed, not a peace treaty.

The solution are two

A) The Americans accept a Nuclear ICBM North Korea within a max of 3 years

B) Some kind of war will start before then.

—Update

President Trump, in a conversation with the Philippines President, admitted there are also 2 nuclear powered submarine circling around North Korea.

–Update 29 May

More ballistic missiles from North Korea and some (at least on paper) new upgrade in their air defence assets.

A third US Aircraft group (the completely refurbished USS Nimitz) is steaming towards North Korea. It will take a few weeks, but it is practically unheard of such a concentration of war assets without a war (something similar happened in major escalations as the start of the bombing campaign against Islamic State, Libya etc).

China seems to take a step back in pressuring North Korea (not stupidly, a cut in the oil supply to North Korea could really have an effect (regime change or, if Kim thinks he has nothing to lose, war).

Russia supplanted China as the only friend of North Korea, but nobody knows to what extent (they opened some trade routes, but are the Russian doing something else? Probably so, but no one knows).

This is a broad-brush move typical of the behaviour of S&P in the last few year. It takes a 10,000 meter view to the sector from new York and does not even care about the details.

The excuse to go was the high property price in Melbourne an Sydney. They did not even realised the lenders like bank of Queensland and Adelaide bank main loan book are not in Melbourne and Sydney (it is Queensland and regional Victoria…which are very far from the bubble level of Melbourne/Sydney and they have very little of the super-bubble apartment buildings).

Quite a bit off the mark, but typical of S&P (which, let’s not forget, brought us the GFC).

Also it did not take into account of the new levy on the big banks and Macquarie.

On one point it settles the argument about the levy. S&P did not downgrade the big banks as, it said, they are government guaranteed. So if they are practically government guaranteed it i only correct that they get charged with the levy. Actually,a s the levy is tax deductible, they should be charged more.